New Delhi: The wholesale price index (WPI) fell in the year to July 25 for the eighth week in a row, but the central bank is seen keeping to an easy monetary stance as rising food prices provide a reminder of a revival in inflation.
Most analysts see the decline in the WPI as a temporary aberration resulting from the annual comparison to high year-earlier prices. In addition, the central bank has said price pressures are building, suggesting it sees no scope to cut interest rates again.
The widely watched wholesale price index fell 1.58 percent in the 12 months to July 25, its eighth successive drop. It compared with a 1.54 percent decline in the prior week and a market forecast of a 1.5 percent fall.
The WPI fell 1.61 percent in the year to June 6, the first and steepest fall on record.
In stark contrast, a food sub-index jumped 9.7 percent from a year earlier. On an unadjusted basis, it rose 0.8 percent in the latest week alone.
"The fact that food and commodity prices remain firm on a de-facto basis means inflation as a whole is a risk and will only become severe as months go by," Jyotinder Kaur, economist at HDFC Bank, said.
The 10-year benchmark bond yield was little changed after the data, while the stock market turned positive and was up 0.3 percent.
Even though the WPI shows falling prices, the central bank is focused on the longer-term inflation potential.
At a policy review last week, it revised up its inflation forecast for the year to the end of March 2010 to 5 percent from 4 percent.
It left its key policy rates unchanged, saying it wanted to nurture growth, but the change in the inflation forecast was taken by analysts as a sign of tightening measures to come.
Analysts polled by Reuters after the policy decision expected the central bank to hold rates steady until December, and saw the possibility of an increase in early 2010.
The central bank cut its lending rate by 4.25 percentage points between October and April to 4.75 percent and the government slashed duties and increased public spending to stimulate the economy hit by the global slump and falling domestic demand.
The economy expanded by 6.7 percent in 2008/09 (April/March), sharply slower than 9 percent in the previous year. The central bank forecast 6 percent growth in 2009/10 with an upward bias.
The WPI has been rising on a weekly basis since March as price pressures slowly build up.
The consumer price index, which has a greater weighting on food items, rose 9.29 percent in June from a year earlier, data showed on July 31.
Analysts say the government may step up measures to try to tame the rise in food prices, as monetary policy is not effective in stemming what is widely seen as resulting from supply-side pressures.
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